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18 February 2008
Mr John Salerian
Assistant Commissioner
Local Government Revenue Raising Study
Productivity Commission
LB2 Collins Street East
MELBOURNE VIC 8003
By email: [email protected]
Dear Sir
Re: Draft Report – Assessing Local Government Revenue Raising Capacity
The Australian Local Government Association (ALGA) welcomes the opportunity to
comment on the draft report of the Commission’s Study into Local Government Revenue
Raising Capacity.
Individual councils may be providing comment on the details of the draft report and state
local government associations will also be providing comment on the report.
ALGA has already provided a submission to the Commission and our comments on the
draft report will be limited to its broad findings.
ALGA views the report as a valuable contribution to the understanding of all spheres of
government about the revenue environment facing local councils and we are pleased
that the report acknowledges the diversity of local government bodies and the
substantial variation in reliance on different sources of revenue. ALGA has long made
the point that rural and remote councils are for the most part reliant on government
grants, particularly the Commonwealth’s Financial Assistance Grants (FAGs).
Quality of Data
ALGA continues to have concerns about the quality of some of the underlying data
about local government revenue in particular although we note that this is an area which
has not been commented on nor does it appear to be of concern to the Commission.
ALGA’s concerns reflect the difficulty we had in obtaining data from the Australian
Bureau of Statistics (ABS) and the clear errors which occurred in some ABS data tables,
such as those relating to the amount of state government funding provided to local
government. There were instances of double counting where Federal funding to local
government was provided through the states.
ALGA has raised these concerns with Commonwealth and State Officials and directly
with ABS officers and there is currently work underway to try to improve local
government data collected by ABS. ALGA is surprised that the Commission appears
not to have confronted similar issues.
Conclusions about Rates as a proportion of GDP
The Commission concludes that Local Government Revenue is around 2% of GDP
ALGA accepts that the proportion is in the order of 2.5% and has been relatively stable
at that level over recent years, certainly since 1999-2000 (ABS Cat 5206.0 and
DOTARS Local Government National Report, various years).
The Commission finds that the ratio of rates revenue to GDP decreased from 1.1% to
0.9% between 1990-91 and 2005-06 and appears to imply this has been a lost revenue
opportunity. The Commission notes that had the ratio remained at 1.1% national
revenue from rates would have been 20% higher – an extra $1.7b
ALGA does not believe that the issue is that clear. The National Inquiry into Local
Government Finance in 1985 (the Self Report) estimated local government rate revenue
in 1980-81 to be $1,498.4 million and revenue from fees and charges to be $156.3
million out of total revenue of $3,107.4 million. Rate revenue accounted for 48.2% of
total revenue and revenue from fees and charges accounted for just over 5%. The
combined revenue from the two sources was about $1,655 million or just over 53% of
total local government revenue.
In 2005-06, revenue from Rates and fees and charges (sale of goods and services)
accounted for an estimated 69% of local government revenue. It would appear that
while rates have declined in relative terms as a source of revenue, local government’s
revenue raising effort has been maintained through the substitution of sale of goods and
services (cost recovery). The draft report implies that the Commission may be treating
rates as the “base level” of funding for local government with fees and charges levied to
provide additional services. If so, then ALGA has some difficulties with such an
assumption.
The trend has been towards cost recovery where appropriate and it is reasonable to
expect that there would have been a reduction in the relative importance of rates as
goods and services, such as the cost of permits and entry to local government owned
facilities such as swimming pools and caravan parks, moved to cost recovery instead of
being funded by general rate revenue. ALGA does not agree that this indicates a failure
of local government to exploit revenue sources and sees this as a useful area for further
work by the Commission.
ALGA does not dispute the usefulness of using GDP as a frame of reference against
which to measure local governments overall revenue sources although it should be
noted that rates are a property tax, reflecting property values & GDP is an income
measure. ALGA has long been concerned about the declining level of Financial
Assistance Grants although the frame of reference we have used is FAGs as a
proportion of Commonwealth revenue. Taxation revenue may perhaps be seen as a
reasonable proxy for GDP. FAGs, as a proportion of Commonwealth revenue, declined
from 1.01% in 1995-96 to just 0.71% in 2008-09. This is a far steeper decline than the
decline in rates identified by the Commission. ALGA has called for the restoration of
FAGs as a proportion of Commonwealth taxation revenue (excluding GST) If FAGs were
restored to the level of 1% of Commonwealth Taxation revenue (excluding GST) in
2008-09. Local government would receive an additional $620 million.
Fiscal Capacity
The Commission asserts that, on average councils, are raising about 90% of their
hypothetical benchmarks in own source revenue. To ALGA this seems a relatively high
level of exploitation of revenue. ALGA notes that the Commission stresses that the
scope for raising additional revenue should not be taken to imply that local government’s
should increase the revenue they raise.
ALGA would argue that the services government provides to the community need to be
considered as a whole as do the taxes and charges for government services paid by
communities.
Over the period 2000-01 to 2005-06, ABS figures (Cat 5506) show that total taxation
revenue increased by 39.05%. Commonwealth income taxation revenue increased by
41.4% over that period but local government rate revenue increased at a higher rate 41.5% - over the same period, from about $6.3b to $8.9b. ALGA argues that this
demonstrates an appropriate level of exploitation of taxation opportunities by local
government. In addition, over the same period, local government fess and charges,
according to the Commission, increased from about $5.6 billion to more than $6.9 billion
in real terms – an increase in revenue of $1.3 billion.
As with other levels of government, the Productivity Commission does conclude that the
major constraint on local government raising additional taxation revenue appears to be
the democratic process. ALGA agrees with that point, noting that local communities do
not generally distinguish between different spheres of government in terms of services
and infrastructure provided, and nor do they distinguish between the spheres of
government in terms of taxation paid. It is difficult for local government to argue that
rates need to increase to pay for government services at the local level when the
Federal Government runs a surplus in excess of $10 billion per annum.
Legislative Restrictions on Revenue Raising
The ALGA supports the Commission’s conclusions that a wide variety of legislative and
regulatory restrictions are imposed by jurisdictions on the raising of own source revenue
although the Commission concludes that only in NSW do the rate pegging and
concessions appear to be significant impediments. ALGA is concerned about the
decision of the Northern Territory to introduce rate pegging which will have a significant
impact on local government revenue.
ALGA questions the Productivity Commission’s conclusion that while rate exemptions
and concessions limit revenue from particular groups, this impost is, at least partially,
offset by reciprocal tax arrangements and reimbursements. Further there is scope for
raising higher revenue from remaining taxpayers.
While there is a reciprocal taxation agreement in place in Tasmania, other jurisdictions
decided not to pursue that course in response to a recommendation in the Hawker
Report which favoured reciprocity. ALGA and state and territory local government
associations were also not in favour of reciprocity. The additional suggestion of the
Commission that other rate payers be charged more does not seem an appropriate
suggestion.
This approach of qualifying or excusing the seriousness of the problem for local
government is also evident in the finding that while statutory fee setting and other
constraints limit the ability of councils to raise revenue from the sale of some specific
goods and services, this is likely to be somewhat offset by flexible fee setting
arrangements for many other goods and services, as well as from rates revenue. ALGA
does not accept that the solution to the problem is to ignore it and try to charge other
users or rate payers more than would otherwise be the case.
Principles for Improved Financial Management
The Australian Local Government Association supports an improved framework for
financial management in local government and has supported work through the Local
Government and Planning Ministers Council to improve the financial and asset
management frameworks applying to local councils.
ALGA looks forward to the finalisation of the Productivity Commission’s Report and to
the further discussion of broader issues of local government funding at a future meeting
of the Council of Australian Governments.
Yours sincerely
Adrian Beresford-Wylie
Chief Executive